Have a Household Employee? Be Sure to Follow the Tax Rules
April 23, 2022If you have one or more household employees, and haven’t been paying taxes on their wages, this may come as a surprise to you:
Failure to properly report and pay taxes relating to a household employee can cost you penalties, interest, or in some cases, a career (public figures take note). Read on for a basic outline of household employee tax rules and how to comply with them.
Who is a Household Employee?
If you pay wages of more than $2,000 per year to any single household employee, or more than $1,000 to all household employees in any calendar quarter, you may be responsible for paying federal Social Security, Medicare, and unemployment taxes.
A household employee is someone you hire to perform household-related services and over whom you exert a level of control sufficient to create an employer-employee relationship. Household-related services include babysitting, housekeeping services, nannies, lawn-care providers, private nurses, and more.
Whether or not a household worker is deemed to be your household employee depends on the specific facts and circumstances of each situation. In general, the more control you exert over the terms, timing and performance of the work the more likely you have created an employer-employee relationship. The more independent the person you hire is, the less likely they will be classified as a household employee.
What are Household Employment Taxes?
There are a variety of taxes that may apply to the employer, the employee or both, depending on the specific situation. These taxes include:
Social Security Taxes. Employer and employee.
Medicare Taxes. Employer and employee.
Federal Unemployment Taxes (FUTA). Employer only.
State Unemployment Taxes. Employer only. Varies by state.
Withholding of Federal/State Income Taxes. Employee only.
How to Comply with the Rules
Individuals who hire a household employee pay any applicable taxes by including Schedule H as part of their personal income tax return. You must obtain a Federal Employment Identification Number (EIN) to file Schedule H.
An employer of a household employee is also required to prepare and file forms W-2 and W-3 and submit them to the appropriate people/agency.
There are also requirements for verifying the identification and eligibility of a potential household employee, including submitting form I-9.
Note: The rules are complex, and the penalties can be onerous. We strongly advise you to consult with a qualified tax professional to evaluate your specific situation and to prepare and file any necessary tax forms.
For More Information
IRS Publication 926 provides an excellent synopsis of the rules related to household employees and how to go about complying with them.
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